After coming within just a couple hundred points of 40,000 in late March before getting a haircut in April, the Dow Jones Industrial Average crossed the milestone for the first time ever on May 16.
Now that Dow 40,000 is here, what might be next for stocks of the original US stock market index?
Dow stocks trailing despite recent momentum
US markets are on pace for a strong 2024: The S&P 500 has gained more than 10% year to date, along with big gains for gold, bitcoin, and a number of other investing assets.
Meanwhile, the Dow—which is comprised of 30 of the largest and most widely held public US companies—is up half that of the S&P 500 thus far this year. But blue chips have been rolling lately. The Dow had a 9-session winning streak snapped on May 13, the longest consecutive rally since December 2023, before rallying once again to cross 40,000. That has helped the Dow recover all of its losses from early April.
A long-term chart of the Dow reveals how rapid the rise to 40,000 has been. It was just several years ago that the blue-chip index surmounted the 30,000 milestone.
The Dow, created by Charles Dow (who also co-founded The Wall Street Journal), took more than 115 years to hit 10,000 in 1999. Just 18 years after that, it hit 20,000 in 2017. It took 3 years to surpass 30,000 (in 2020) as well as 40,000.
What's the big deal about Dow 40,000?
Do these milestone numbers matter? Well, that comes down to whether you believe in the psychological significance of round numbers.
Many investors think milestones can act as barriers or price ceilings at first. Perhaps these round numbers serve as a trigger for investors to ask themselves if the index or investment is actually worth the market value. There might also be trading reasons, based on price levels where buy and sell orders are placed—with round numbers being widely used—causing trading activity to increase in one direction or the other.
Psychologically significant price levels can be seen across asset classes. Gold, for example, had grappled with $2,000 for years. It rallied to and fell below $2,000 numerous times over the course of several years. When it finally surmounted that price level this year and held above it, gold rallied further and is now trading above $2,300, as of mid-May.
Once investments get past these perceived psychological barriers, that can serve as momentum for accelerating prices increases—to some extent. Alternatively, if these price levels are not surpassed, that can act as a reason to be bearish. It’s worth noting that these signals, largely used by technical chart analysts, are generally meaningful for relatively short periods of time.
Dow 40,000
It would be foolish to assume that the Dow is assured of pushing quickly past its milestone—or that 50,000 is just a couple years away—based on historical trends. After all, the Dow did recoil from 40,000 back in March.
With that said, markets have a demonstrated history of producing long-term gains. And the Dow’s recent momentum has made it possible to reapproach and potentially overcome the latest milestone. In the near term, it will take sustained earnings strength (along with bullish drivers, such as constrained inflationary pressures) to maintain the Dow’s momentum. Of course, there is always the possibility of a black swan event that can come in and take the wind out of the market’s sails.
Dogs of the Dow
Given the special status of the stocks that make up the Dow, many investors look at components of the Dow to assess the market and create trading strategies.
The so-called “dogs of the Dow," for example, is an investing theory based on the premise that investors can buy the 10 blue-chip stocks that underperformed in the prior year, hold them for a full year, and then rebalance at year end with the new dogs of the Dow as each year rolls over. Some practitioners of this theory use highest dividend yield as a proxy, given that dividend yield rises as the price of a stock falls, all else equal.
Heading into 2024, here were the dogs of the Dow:
- Walgreens (
) - Verizon (
) - 3M (
) - Dow Chemical Company (
) - International Business Machines (
) - Chevron (
) - Amgen (
) - Coca-Cola (
) - Cisco (
) - Johnson & Johnson (
)
It's worth noting that this strategy has a mixed historical track record. Thus far, the dogs are getting beaten down this year, having lost roughly 1%. Of course, with any investing strategy you must make your own determination whether it is consistent with your investment objectives, risk tolerance, and financial situation.
Uncharted territory
While investors may think they act rationally all the time, avoiding making emotional decisions, that’s obviously not always the case. Will the psychological significance of Dow 40,000 shape market direction over the short term? If the Dow does continue past the milestone, there’s some historical evidence that could provide impetus for it to play catch-up to the S&P 500 and other indexes (assuming markets continue to rally).
Regardless, with the Dow having reached 40,000, this could present an opportunity for you to take stock of your strategy and investment mix. Earnings, inflation, Fed moves on interest rates, geopolitical events, and uncertainty surrounding upcoming US elections, to name several things, all represent factors that could change the course of the market at any time.